Last month, trade and tariff discussions dominated the headlines. For the month of August, the S&P 500 increased 3.26%, as the FTSE All World Ex-U.S. Index was flat. Year to date through August 31st, the S&P 500 was up 9.94% and the FTSE All World Ex-U.S. Index declined -1.53%. Aside from market performance, investors focused on strong U.S. economic data which points to accelerating growth.
Total nonfarm payroll employment increased by 201,000 in August, and the unemployment rate was unchanged at 3.9%, the BLS reported. Real gross domestic product (GDP) increased at an annual rate of 4.2% in the second quarter of 2018 according to the 2nd estimate by the BEA. The August ISM Manufacturing Index rose from 58.1 to 61.3, which was the strongest number since May of 2004. Consumer spending is positive, as increases in disposable income from the tax cuts take effect. Going forward, growth should continue to be strong for the next few quarters before slowing in the second half of 2019, due to higher interest rates and a fading fiscal stimulus.
Inflation has generally been rising, with headline CPI up 2.9% year over year and core inflation up 2.4% year over year. The Fed has raised its target for the federal funds rate and raised economic growth and inflation forecasts at its most recent meeting. We believe that there may be two more rate hikes in 2018 and at least two more in 2019.
The Case for Global Diversification
Though global economic growth is strong, international markets have not performed well this year, as mentioned above. We believe this is due to Trump’s ongoing tariff and trade policies, as well as a strengthening U.S. dollar. Though this can be worrisome for investors, it’s important to note that international investments are an important part of a well-diversified, long-term portfolio.
By diversifying a portfolio by asset class and geographic region, one may lower risk and potentially increase returns, especially in volatile markets. A globally diversified portfolio tends to perform better over time than a non-diversified portfolio and allows investors to capture returns when they occur.
Consider the return of the S&P 500 Index during “The Lost Decade,” between January 1, 2000 and December 31, 2009. Over those 10 years, the S&P 500 Index had a cumulative total return (including dividends and interest) of -9.1%. When comparing this return to the returns from an international index, international indexes performed better. For example, the FTSE All World Ex Us Index had an annualized return of 41.56% and the MSCI All World Ex US had an annualized return of 17.47% between January 1, 2000 and December 31, 2009. We advocate that broad diversification becomes even more important in times of uncertainty because it helps to reduce country, stock and/or issue-specific risk and increases the consistency of outcomes relative to concentrated portfolios. Over the long term, an allocation to international can be an essential component of an investment plan.
Currently, P/E valuations are lower for international and emerging markets relative to U.S. P/E valuations, which indicates an area of opportunity, especially in a bear market. Finding the right mix of different investments that allows investors to pursue their financial goals and stay disciplined is a key tenet of investing.
If you are a client and would like further detail on these topics or anything else, please don’t hesitate to call or email us. If you are not a client but would like more information on Callan Capital’s wealth management services, please contact us at (858) 551-3800 or visit www.callancapital.com.
Data are as of September 11, 2018
Past performance does not guarantee future results.
Diversification does not guarantee investment returns and does not eliminate the risk of loss.
The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index. Indexes are unmanaged.
The FTSE All-World ex US Index is one of a number of indexes designed to help investors benchmark their international investments. The index comprises Large and Mid cap stocks providing coverage of Developed and Emerging Markets excluding the US. The index is derived from the FTSE Global Equity Index Series (GEIS), which covers 98% of the world’s investable market capitalization.
The MSCI World ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries*–excluding the United States. With 1,016 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
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Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities based financing, residential and commercial financing and cash management services.
The views expressed are those of Callan Capital, LLC. They are subject to change at any time.